How to Re-evaluate Fixed Income Portfolios in Light of Rising Interest Rates

Investment portfolios have to be re-imagined when market disruptions occur. Market disruptions can cause several changes in the investment sector. One major change due to market changes is the rise of interest rates. There are several reasons why interest rates rise like, inflation, fall in production capacity, and money supply. Investment banks and individual investors should be aware of the changes in interest rates for better decision-making. Sometimes, you need to re-image your investment portfolios due to changes in interest rates. Read on to know how to re-evaluate fixed income portfolios when there are changes in the interest rates.

Understanding fixed income portfolio

Investment securities that pay a fixed amount until their maturity date to the investor fall under a fixed income portfolio. Usually, the investor receives a fixed interest amount after investing in fixed income security. For example, government-issued bonds and treasury bills are securities that pay a fixed interest rate to the investor until their maturity.

When fixed income security matures, the principal amount is provided to the investor. Since a fixed amount of income will be provided to the investor in a fixed income portfolio, it is a low-risk investment. There are different strategies for fixed income investment followed by investors. Commonly used strategies for fixed income investment are laddered bond portfolio, barbell bond portfolio, and bullet bond portfolio investing. Now that you know about fixed-income portfolios, let us see how they are affected by rising interest rates.

How do changes in interest rates impact fixed income portfolios?

Changes in interest rates have a direct impact on fixed income portfolios. Some ways in which changes in interest rates impact fixed income portfolios are as follows:

• There is a relation between the yield and the price of a bond. The yield of a bond is defined as the interest payments received by an investor. When the yield of a bond rises, there is a decrease in its price. Changes in the market interest rates can impact the price of fixed-income securities.

• Changes in interest rates affect the maturity duration of fixed income securities.

• When there are frequent changes in the interest rates, investors look for risk-free fixed income securities. Investors ignore volatile fixed income securities when there are frequent changes in the interest rates.

As you can see, many changes occur in fixed income portfolios due to changes in interest rates. As a responsible investor, you need to re-image your fixed income portfolios to cope with the changes.

How to re-evaluate fixed income portfolios?

You should invest some time into fixed income research for re-imagining your investment portfolios. Based on the current interest rates, you can project the capital structure and yield of fixed income securities. Under fixed income research, you need to re-imagine the value of the asset and the average returns.

One can find it challenging to conduct portfolio research. It is why one can partner with a reliable third party for research related to investment portfolios. Evaluate your fixed income portfolios in the light of rising interest rates in 2022!